If you own a business and you plan to leave it to one of your children when you die, be aware that taking out a business loan or line of credit could affect your estate plan. The reason: Many wills that provide that a child will inherit business assets don’t specify whether the child will inherit the assets subject to any debts, or whether the child will inherit the assets free and clear and any debts must be paid off by the other heirs.
In the past, unless the will was clear, the assumption was that the other heirs had to pay off any loans. But recently many states have changed their laws, and now say that the child who inherits the business also inherits the debt. You can change these assumptions if you want, but you have to be very specific about it in your will. In any event, it’s wise to consider the effect of business loans on your estate plan, and make sure your will specifies exactly how you want your property to be divided.